On May 20, 2019, in Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. ___ (2019), the Supreme Court resolved an area of ongoing concern for parties to trademark licenses. The court addressed a circuit split on whether a trademark licensee may continue to use a trademark for the term of the license, after the license has been rejected in bankruptcy.  In Mission, the debtor-licensor rejected a trademark license agreement and sought to terminate the licensee’s right to use the debtor’s trademark. This decision has important ramifications to parties to trademark licenses.

Bankruptcy Code section 365(a) provides a debtor (i.e., the bankrupt party) the right to reject executory contracts – i.e., contracts where both parties have performance obligations remaining. Pursuant to Bankruptcy Code section 365(g), such rejection amounts to a breach of the contract. To avoid the claim from being viewed as occurring after the bankruptcy filing, section 365(g) provides the breach is deemed to occur immediately before the filing of the debtor’s bankruptcy petition.

The Supreme Court was asked to determine the effect of a rejection of an executory trademark license by the debtor, the estate of the trademark licensor, pursuant to Bankruptcy Code section 365. The rejection may give rise to a damage claim, but did it otherwise leave the counterparty, the trademark licensee, the right to use the trademark it had received under the contract, or did it terminate the entire agreement along with the right to use the trademark?

The Supreme Court held a debtor-licensor’s rejection of a trademark licensing agreement in bankruptcy does not terminate the rights of the non-debtor licensee that would survive the licensor’s breach under applicable non-bankruptcy law—including the continued use of the trademark.  The rationale is that the rejection of an executory contract is a court-authorized breach, which may give rise to a damage claim against the debtor, but does not put the parties back in the positions they had before entering into the contract, which rescission would do. Notably, the debtor’s rejection does allow the debtor-licensor to stop providing any services the licensee may have required such as quality control or maintaining a certain image of the trademark.

Section 365(n) of the Bankruptcy Code allows a licensee of patents or copyrights whose license is rejected to either treat the license as terminated and assert a claim for damages, or retain its intellectual property rights under the license.  Section 365(n) refers to the Bankruptcy Code definition of “Intellectual Property” which includes patents and copyrights but does not include trademarks. The legislative history of section 365(n) suggests that Congress intentionally excluded trademarks from the definition because of the special concerns relating to trademark licensing, and expressly left that issue to the courts to decide. See S. Rep. No. 100-505, at 5, 7 (1998) (since issues relating to trademark licensing could not be addressed without more extensive study, it was determined to postpone congressional action in this area and to allow the development of equitable treatment of this situation by bankruptcy courts).

In reaching its conclusion, the majority opinion focused on the general rules of rejection in Bankruptcy Code sections 365(a) and (g), and on the effect rejection has on all executory contracts—not just trademark licenses. That the specific provisions in section 365(n) do not include trademarks does not change the general rule that rejection of an executory contract does not rescind the rights the contract previously granted. Justice Sotomayor’s concurrence highlighted the decision did not mean every trademark licensee would have rights to continue using licensed marks post-rejection. The inquiry remains whether the licensee’s rights to use the trademark for the duration of the license would survive a breach under applicable nonbankruptcy law, taking into account all applicable special terms of licensing agreements or state law.

Naturally, intellectual property licensing is a key part of many commercial arrangements. This decision sheds light on an aspect of that practice which, when disputed, was subject to different analyses depending on the jurisdiction of the dispute. When negotiating intellectual property licenses, parties should keep this decision, the entire set of jurisprudence around section 365(n), and applicable state law regarding breach of contract in mind in order to ensure the desired outcome in the event of a bankruptcy of the licensor in the future.

Photo of Steve Ma Steve Ma

Steve Ma is an associate in the Business Solutions, Governance, Restructuring & Bankruptcy Group, resident in the Los Angeles office. Steve’s practice focuses on the representation of debtors, creditors, statutory and ad hoc committees, and equity holders in chapter 11 cases and out-of-court…

Steve Ma is an associate in the Business Solutions, Governance, Restructuring & Bankruptcy Group, resident in the Los Angeles office. Steve’s practice focuses on the representation of debtors, creditors, statutory and ad hoc committees, and equity holders in chapter 11 cases and out-of-court restructurings.

Steve also has experience in assignments for the benefit of creditors, and general corporate and finance transactions in a variety of transaction structures.

Photo of Vincent Indelicato Vincent Indelicato

Vincent Indelicato is a partner in Proskauer’s Corporate Department, and a member of both the Business Solutions, Governance, Restructuring & Bankruptcy and Private Credit Restructuring Groups. His practice focuses on corporate restructurings, with an emphasis on the representation of direct lenders, ad hoc…

Vincent Indelicato is a partner in Proskauer’s Corporate Department, and a member of both the Business Solutions, Governance, Restructuring & Bankruptcy and Private Credit Restructuring Groups. His practice focuses on corporate restructurings, with an emphasis on the representation of direct lenders, ad hoc groups, bondholders, and creditors’ committees both out of court and in chapter 11. He is frequently consulted by leading distressed hedge funds, BDCs, private credit lenders, private equity investors and creditors on complex domestic and international insolvency and restructuring issues, including intercreditor and interlender matters, across a variety of industries. Vincent is also part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic. Vincent has been recognized by the American Bankruptcy Institute for his “formidable courtroom presence with natural dealmaker instincts” as a recipient of the 40 Under 40 Award, and an Outstanding Young Restructuring Lawyer by  Turnaround and Workouts.

Over the last several years, Vincent has played a lead role in some of the most significant corporate reorganization cases in the United States. These include his representation of the Statutory Committee of Unsecured Claimholders in the chapter 11 cases of Caesars Entertainment Operating Company Inc., which filed for bankruptcy with more than $18 billion of funded debt; the Los Angeles Dodgers in their $2 billion acquisition by Magic Johnson and Guggenheim Partners; Brookfield Asset Management in the $2.5 billion debt restructuring of Kerzner International’s Atlantis Bahamas Resort; and J.P. Morgan and other substantial creditors in the chapter 11 cases of MF Global, a financial services company with $41 billion in assets. He also serves as counsel to the Statutory Committee of Unsecured Claimholders in the multi-billion dollar chapter 11 cases of Westinghouse Electric Co. LLC, represents an ad hoc group of second lien noteholders in the chapter 11 cases of Avaya Inc., which filed for bankruptcy with more than $6 billion of funded debt, and acts as lead counsel to the Statutory Equity Committee in the chapter 11 cases of Breitburn Energy Partners L.P., an oil and gas master limited partnership with more than $3 billion of funded debt.